Glimpse into MPC's thinking on interest rates

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Cape Town – South Africa’s lagging growth rate of around 2% was “dismal” and showed no room for complacency, SA Reserve Bank (Sarb) Deputy Governor Daniel Mminele said late on Wednesday.

Speaking at a Monetary Policy Forum in Cape Town, Mminele highlighted the current economic risks and trends that influenced the Monetary Policy Committee (MPC) announcements to keep the repo rate fixed at 5.75% and what the thinking was going forward.

He said domestic challenges such as the electricity crisis (which could have been avoided) and food inflation (caused by drought and thus unavoidable) compounded a tricky global environment.

While global issues were often key drivers, Mminele said it was important to get domestic issues under control. “The challenges sit in the domestic environment,” he said. “It is the tail that moves with the dog globally. The bit we can control, we need to get right.”

Electricity price hike

The MPC could hike interest rates in November if energy regulator Nersa grants Eskom its additional 12.6% increase in electricity tariffs, which will be decided at the end of June.

If granted, Sarb believes the hikes would only be implemented in September 2015.

“If Eskom’s application is successful, it is unlikely that the additional 10.1% increase [to cover high generation costs from diesel powered open cycle gas turbines] would be implemented in July, as has happened historically,” Sarb said in its June Monetary Policy Review.

“Municipalities have already prepared budgets. They would also require their own approval from Nersa to amend the electricity prices they charge to their clients.

“Electricity price hikes are assumed to return to 13.1% for 2016/17 and 2017/18.”

Time to become more efficient

The high prices might force South Africans to become more efficient in how they use electricity, according to Sarb financial markets head Leon Myburgh.

“Our energy efficiency in South Africa is very poor,” he told the forum.

“[According to the World Bank], Brazil is effectively twice as efficient as we are, or they use half the amount electricity that we do to produce the same amount of output.”

Myburgh said load shedding caused “quite a big constraint in terms of how we view economic growth going forward”.

“Electricity supply constraints affect economic growth by interrupting production in the short term, and deterring investment, which is a longer-term problem,” Sarb said in its June Monetary Policy Review.

Inflation targeting

Mminele said that while the Sarb was not “obsessed” with inflation targeting, it was the internationally-proven method for the current global economic environment.

“There are no plans to abandon inflation targeting at the moment,” he said. “The current consensus is that it delivers the goods.”

He said the inflation rate was determined by computing an average basket of goods, as well as taking into consideration other factors.

However, this week’s Fitch rating announcement and next week’s S&P rating announcements would only be taken into future repo rate decisions if they were to dip to “sub investment categories”.

Will there be a repo rate hike?

The million-rand question at the forum was: “Will the MPC hike the repo rate this year?”

The answer from the eloquent Mminele: “At this point in time, we see the risk profile is skewed to the upside and that should we deem it necessary based on how these risks evolve we will not shy away from doing what we think is appropriate.”

According to Mminele, Sarb is mandated by the Constitution to protect South Africa’s currency to ensure a sustainable and balanced growth outcome for the economy.

AUDIO: Listen to the full forum session

SLIDESHOW: Move audio to following times to correspond with slideshow

- Slide 1: Deputy Governor Daniel Mminele begins presentation (Time: 12:40)

- Slide 5: Sarb Financial Markets Department head Leon Myburgh (Time: 17:45)

- Slide 26: Sarb’s head of international relations and economic policy Logan Rangasamy (Time: 42:10)

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